Things to Know Before Investing in Pot Stocks

Published
05/08/2017

With the rise in the legalization of marijuana, comes the expanse of companies related to the cannabis industry. Start-ups are popping up left and right to grab a piece of the market, which in turn is causing a flood of new investors into the pot stock market. According to Forbes, "when Colorado legalized adult-use marijuana, pot stocks shot up. It was called the Colorado effect. Shell companies slapped the word marijuana or cannabis or green in the title and it was off to the races. Stocks like Growlife, Inc. had $8 million in revenue, but a market cap of $850 million. The stock traded at over 50 cents in 2014 before trading was suspended due to questions regarding information accuracy. It was recently listed as having a $16 million market cap and the stock trades at one cent."

Pot stocks work completely different than other stock market industries, this is because the legality of marijuana differs depending on the state and it is a highly discussed topic. But why do they work differently? The answer is that the entire stock market for the marijuana industry depends directly on news & media, and how it's portrayed. It is one of the only industries that has this reputation. For example, if Jeff Sessions or Sean Spicer releases a statement that negatively focuses on marijuana, the entire whole of pot stocks in turn will drop.

1. Read the filings.

New investors can find a companies stock filings on the Securities Exchange Commission site or any exchange sites. Basic information can also be found on both Yahoo and Google finance pages. Barry Clark, Chief Executive Officer at FlowerKist, says to check revenue figures and make sure there is some money coming in. During the Colorado effect days, many pot stocks traded on simply an idea or a company with the word cannabis in it and had no real business to back up their image.

2. Pump and dump.

Some traders buy stocks and then publicize something positive written about the company in order to drive up the stock price. Unsuspecting investors are unaware that these traders will sell their shares and reap the profits. Clark warned investors at the California Cannabis Business Expo to do their homework on the stocks that interest them. “Before you jump in and buy, check sites like stockpromoters.com and see if it shows up there as a highly promoted stock,” he said. Clark also cautioned investors about a Facebook page called Fabulous Penny Stocks. “They are actively involved in promoting stocks,” he warned.

3. Management.

Clark said if an investor really wants to check on a company, he or she should pick up the phone and calling them. “If you only get voicemail or the mailbox is full or no one ever answers your call or gets back to you, then that is a bad sign,” he explained. Check financial websites like Yahoo Finance to see if management is selling any of their shares. If they believe in the company they won't be selling their shares.

4. Check the exchange.

There are companies associated with the cannabis industry on the larger exchanges like Nasdaq and the New York Stock Exchange. Cannabis industry insiders generally consider GW Pharmaceuticals, Insys Therapeutics and Zynerba as biotech companies and not “true” marijuana stocks. Innovative Industrial Properties, which trades on the NYSE, is a REIT that invests in grow facilities and is viewed mostly as a real estate company. If you have a weak stomach, this may be a good place to start. Most of the true marijuana stocks trade in the over-the-counter market, which has varying levels of transparency. Clark advises sticking with companies in the OTC QX and QB level. He suggests avoiding the pink sheets stocks altogether.

5. Rainbows and unicorns.

If it's always sunny in the pot stock you like, be skeptical. If a company puts out multiple press releases, say daily or weekly, be wary. Legitimate companies will only issue a press release when there is real news and this isn't on a daily basis. Newsletters and marijuana news websites that only speak glowingly of companies may be getting paid to do so. Even the best companies will have some negative press. If the company you are considering for an investment is featured in a story that has no mention of weak spots for the company, then be cautious.

There are lots of things to beware of and lots of research to be done, thus investors looking to invest into marijuana stocks should be wary before dumping all of their money into shares of the next up-and-coming cannabis start up.